Review of the week: ING Direct Savings Account 2.75%

With many people only now realising the impact last year’s interest rate falls have had on their savings returns, ING’s savings account, which guarantees to pay 2.75% for the next 12 months, is proving a hit.

We unpick this account to help you work out if it’s the right home for your savings.

What’s the deal?

New customers who open an ING Direct Savings Account will receive an interest rate of 2.75%. While not the highest easy access rate on the market, it is very competitive and one of the best buys (the top easy access rate is 2.90%).

The rate is fixed for 12 months after which it will switch to ING’s standard savings rate which is variable - currently 0.50%.

This is a highly flexible easy access account: you can open one with as little as £1 and pay money in whenever you want. You can also make unlimited penalty-free withdrawals.

Applications can be made online or over the phone, although you must have a UK current account in order to qualify. The reason for this is that this needs to be set as a linked account from which you can transfer funds into and out of your savings account.

ING Direct is not part of the UK Financial Services Compensation Scheme (FSCS). This doesn’t mean your money isn’t safe. Instead you are covered by the Dutch scheme, which actually offers greater protection than the FSCS. Up to €100,000 (about £85,000) is totally guaranteed – this compares with £50,000 under the FSCS.

Any catches

The rates on most easy access accounts are variable, while ING’s is fixed for the first year. This could be a good thing as it is guaranteed not to fall over the next 12 months. However, it is also guaranteed not to go up which means you may lose out if interest rates start rising.

If you are an existing ING Direct savings customer, you won’t qualify for this deal.

Verdict

The reason why this account is so popular with savers at the moment is probably due to the fact the rate is guaranteed not to fall during the first year. Given that variable rate savings accounts plummeted as a result of the Bank of England base rate falling from 5.00% to 0.50% between October 2008 and March 2009, it’s not surprising that people are attracted by the certainty of the ING Direct Account.

However, think about where we are in the interest rate cycle: base rate is at a historic low of 0.50% and won’t fall any lower. Therefore, just how valuable is a 12-month rate guarantee? Most variable rate savings accounts aren’t directly linked to base rate so in theory could fall even if there is no change in the Bank of England rate. This is a risk, but in the vast majority of cases it unlikely to happen in the current environment.

Conversely, we know that base rate will start to move upwards at some point – we just don’t know when. Some economists think it will rise before the end of the year. If this happens and you open an ING account now, you definitely won’t benefit from a higher savings rate as a result because the rate is fixed.

Therefore, the guarantee is arguably not as good as it first appears. That said, this account is one of the most competitive easy access rates currently available and of course, you have the peace of mind that the rate won’t drop for a year. If interest rates do start to rise in the next 12 months and it loses its competitive edge in comparison to other easy access accounts, you can always move your money as there are no withdrawal restrictions.

You should make a note to move to an alternative account after 12 months as the rate will drop substantially at that point.

Top tip

Get into the habit of regularly checking your savings rate. The easy access savings market is highly competitive but the leading deals tend to include introductory bonuses or 12-month headline rates. Providers know most people will forget to move their money once the introductory offer ends, so make sure you’re not one of them. Maximise the returns you can get on your savings by getting into the habit of moving your money every year.

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.